Will we get a triple-dip in housing? We might…

It’s been difficult to be bearish in 2012. First, we had the chorus of perennially wrong bottom callers make their usual prognostications, then Calculated Risk called the bottom, then the banks unexpectedly and abruptly slowed their rate of REO processing to create a shortage of MLS inventory. This MLS shortage has resulted in bidding wars, rising prices, and falling sales volumes. With those conditions, even the serious problems overhanging the market look insignificant. Most of the bears have gone into hibernation and their views have been largely ridiculed much like they were in 2006. Even I have caved in to the market bulls. It’s hard to argue for lower prices when affordability is high and supply is low.

There are still a few unabashedly bearish bloggers. Tyler Durden at ZeroHedge is still bearish, and so is mortgage analyst Mark Hanson.

Housing saw its stimulus peak in q2. Now for the year+ long hangover / “triple-dip” trade.

Rates, sentiment, and prices – in aggregate — have never been better and YoY comps never easier to beat – comping against a stimulus hangover/double-dip year — and still July Existing Sales was only up 2.3% YoY.

This is a great point. In 2011 prices fell all year and sales volumes were very low because the tax stimulus pulled so much demand forward into 2010. The fact that 2012 was only a slight improvement over 2011 reveals much about the ongoing weakness in the market.

For the remainder of the year – and through July 2013 at least — YoY comps will be negative, as last year’s Twist ops and lack of rain/snowfall benefit turn into a headwind.

We should see a season retreat this fall and winter, but with the lack of inventory, we have considerable carry-over demand from this summer’s buyers who did not get homes. I think demand will remain relatively strong this winter for that reason.

Bottom line, this year’s housing stimulus cycle (once again mistaken by Wall St, the media and bloggers for a “durable recovery” with “escape velocity”; (a full blown “recovery” without ever stopping at the bottom for a while) is now over and the stimulus hangover begins. This is a repeat of the 2009/2010 home buyer tax credit stimulus cycle followed by the 2h’10/1h’11 hangover/double-dip.

If the market does turn south, I will give Mark kudos for having the courage of his convictions. I lost mine. The chorus of wishful thinkers has brainwashed me to believe that perhaps the banking cartel can succeed in manipulating the market to save their skins. Right now, it’s hard to argue against their success.

The Sad Part About This

The sad part about the upcoming stimulus hangover / “triple-dip” event is that it didn’t have to turn out this way. The Fed did its job. By creating negative real yields and forcing mortgage rates to levels that not only forced first timers in all at once (very much like the tax stim of 2010) but forced institutional investors into rental property investment in search of yield, they created more than ample demand.

Yes, the federal reserve did create demand by it’s policies in exactly the way Mark described. Since there are so few competing investments providing stable yields, even the paltry 6% to 8% cash yields in real estate look great in comparison.

But the relentless bank and gov’t foreclosure can kicking – banks in order to kick losses and gov’t to get re-elected – on the 5 to 6 million “*rolling” distressed loans IN ADDITION TO the re-leveraging of 5 to 7 million high-risk legacy loans into higher risk / leverage new-vintage loans (aka loan mods) took away millions of units of supply that would have otherwise been purchased by first timers and investors over the past year.

Mark packs a lot into each sentence. First, he is right about the “can kicking.” Amend-extend-pretend is the only policy the banks have. they can’t afford the losses, so they keep pretending they haven’t lost the money until prices come back to make them whole.

Second, his reference to rolling distressed loans is an accurate description of loan modification programs. The bulls all point to falling delinquency rates as the end to the problem. However, much of this drop is due to ongoing efforts to modify loans. These efforts will fail as they always have, and these loans will recycle back into the foreclosure system. Only this time, the US taxpayer will be liable for the losses instead of the stupid lenders who made the bad loans.

*Shadow Inventory Note…I say “rolling” because “shadow inventory is not static. Most “analysis” I read make no mention of this rather only talk about how quickly it will clear based on 400k monthly existing home sales. But they have their numerators and denominators all wrong. Shadow Inventory increases by the number of new “60 day lates” and “mortgage mods” granted each month — both have a 75% chance of foreclosure in 2 years — and decreases by the number of “distressed” existing home sales per month. Because there are roughly 130k 60-day lates + mods and only 110k distressed resales per NAR, shadow inventory is growing by abut 20k units per month right now.

I pointed out the ridiculousness of how shadow inventory is reported too. When referring to shadow inventory, a responsible reporter would try to establish a measure of when it will completely disappear. That’s not what they report. Previous reports on shadow inventory have shown a six month supply for the last several years. Does that make any sense to you? It’s all a concerted effort to make the problem look smaller than it is in order to minimize public perception of a huge problem.

In short, if foreclosures and short sales had been running at 2+ million a year like they should have been all along house sales would have been 50% to 75% greater this year, “escape velocity” may have been reached, and this would have gone a long way into the ultimate de-leveraging of 20+ million legacy years homeowners that needs to occur before this housing market ever finds a “durable” bottom.

Unfortunately, if that many foreclosures would have been processed, prices would have declined significantly, and the banks would be worried about continued deterioration and larger losses. The banks simply cannot afford deleveraging that’s coming. So they are extending the pain while they earn their way back to solvency. If they can manage to withhold enough product for force prices higher, they might even be able to improve their capital recovery when they finally do process their backlogs.

But because it all continues to be about can kicking, housing will go into a ”triple dip” in the next couple of quarters, which will last a couple of quarters at which time rates will be forced under 3% in order to recreate the same conditions that came on 3.5% this time around.

If rates do fall to 3%, affordability will be truly outstanding. That will prompt more buying — assuming some supply comes to the market to meet that demand.

It’s hard to argue against his conclusions. We are in an artificial market completely manipulated by government officials, the federal reserve, and the banking cartel. I wonder if that is ever going to change. Lately, I have been doubting that too. We may have a nationalized housing market in perpetuity.

California governor Edmund G. Brown signed into law a bill to help combat neighborhood blight, state attorney general Kamala Harris announced Monday.

The bill—AB 2314—gives new homeowners additional time to fix any code violations in a home before local agencies move in to enforce the codes. It also extends indefinitely an existing provision that requires the owner of a foreclosed property to maintain the property.

“We need solutions to the problem of blight which threatens the health and safety of California communities hit hardest by the mortgage crisis,” said Wilmer Carter (D-Rialto), assemblymember and the bill’s author. “AB 2314 will ensure that local jurisdictions continue to have the tools to prevent and fight neighborhood blight due to foreclosures.”

The new law is part of Harris’ California Homeowners Bill of Rights, a series of bills designed to extend reforms first negotiated in the national mortgage settlement. Two previous bills were signed into law in July.

Other components of the Homeowners Bill of Rights are pending in the legislature. They include provisions that would enhance law enforcement responses to mortgage and foreclosure fraud and grant Harris the ability to convene a special multi-jurisdictional grand jury when necessary.

Another bill that would grant protections to tenants in foreclosed homes is currently awaiting action by the governor.

Realtors association said the bulk sale of 500 Fannie Mae-owned foreclosed homes could hurt the communities where the sales are implemented.

The California Association of Realtors recently said the planned bulk sale of about 500 Fannie-Mae owned homes that have been foreclosed upon in Los Angeles and the Inland Empire would hurt the local housing market, but the Federal Housing Finance Administration was moving ahead with the plan.

“We are disappointed that Fannie Mae and the FHFA fail to understand that this initiative will harm the communities in which it will be implemented and are going forward with this ill-conceived plan,” CAR President LeFrancis Arnold said.

“Moreover, not only are Fannie Mae and FHFA moving forward with the plan, they are refusing to disclose any details, such as property locations, final property count, sales price, or names of winning bidders.”

According to CAR, the FHFA, Fannie Mae’s conservator, has announced that winning bidders in the foreclosure auction had been picked, with sales expected to close in the third quarter.

In July, Fannie Mae created a limited liability corporation called SFR 2012-1 US West LLC to receive the foreclosed properties from Fannie Mae.

It is unclear if the winning bidders will get the LLC or only a share, which would split ownership between Fannie Mae and the winning bidders. That prompted CAR to ask the FHFA to disclose how the deal will shake out. It filed a Freedom of Information Act request for answers.

“We are also greatly concerned that the FHFA used extremely outdated market data, perhaps as old as 2011, to determine property valuations,” Arnold said.

“Because the transactions are only now in the process of closing, these dated valuations will drag down the Inland Empire’s home prices, which have shown strong signs of stabilization.

“Additionally, because of this price discrepancy and the very nature of bulk sales, we believe Fannie Mae is assured to not receive fair market value for the properties, thereby saddling taxpayers with their loss.”

Florida’s state rEALTOR® association will soon begin publishing a home price index that’s based on repeat sales, rather than median home price, and the National Association of rEALTORS® has a similar project in the works.

The National Association of rEALTORS® and most state and local rEALTOR® associations currently track median home prices. But indexes that track median home price don’t necessarily provide an accurate picture of what’s happening to the value of housing, Florida rEALTORS® said.

That’s because changes in median home price may reflect a change in the mix of housing sales, rather than an underlying trend in housing values. An increase in the proportion of sales at the lower end of the market, including distressed property sales, may push down median home price, for example. Conversely, an an increase in median home price may reflect increased sales of larger, more luxurious properties, rather than appreciating home prices, the trade group noted.

To address such issues, the Standard & Poor’s Case-Shiller Home Price Indices and the Federal Housing Finance Agency’s Home Price Index track repeat sales or refinancings of the same property.

But rEALTORS® have questioned the accuracy of the S&P Case-Shiller index, and FHFA’s Home Price Index tracks only single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac since January 1975.

The new Florida rEALTORS® Real Estate Price Index will use data from the Florida Department of Revenue to chart home prices for the state and metro areas during the last 17 years.

Florida rEALTORS® will post more information about the index and how it works next month on the research page of Florida rEALTORS®.org. Soon after that, the group says it will begin publishing a statewide real estate price index, with indexes for individual metro areas available only to rEALTORS® who provide login information.

“This is really the first of its kind in the nation,” Florida rEALTORS® Chief Economist John Tuccillo said in a statement. “No other state has a real estate price index that’s this comprehensive, and we’re pretty proud of it.”

NAR is working on its own version of a repeat sales price index, but the the task “is quite a bit bigger” on a national scale, rEALTOR® Magazine reports.

“It’s an ambitious and complicated undertaking, and it’ll take some time for the database to be robust enough to really give a clear picture of what’s happening, but the effort is promising,” rEALTOR® Magazine Senior Editor Robert Freedman says of the Florida rEALTORS®’ home price index.

One challenge facing anyone building a home price index is removing anomalies like home price increases that stem from renovations or additions, or price drops due to storm damage or non-arm’s-length transactions.

Indexes based on repeat sales typically suffer from a time lag, because of the time it takes before data on closed sales data is available from public records.

Florida rEALTORS® is currently inputting 2011 data that’s only recently been made available. Going forward, the index will be updated on a quarterly basis using state MLS data, which will be reconciled with actual 2012 numbers once the state’s data becomes available next year, Tuccillo told rEALTOR® Magazine.

In December, NAR said it had overestimated home sales by more than 14 percent since 2007 because of a drift in an adjustment made to MLS data to account for sales that take place outside of MLSs. In publishing “rebenchmarked” home sales statistics going back to 2007, NAR said previously reported estimates of median home prices and months’ supply of inventory were not affected by the error.

To set comparable by tracking repeated sale may be legit. Tracking repeated refinancing is highly questionable. What to stop, a quick round of cousin A selling to cousin B, cousin B to cousin C, etc. With the bank and other buyers holding the bag. Sounds like a good plan to me. (taxpayers will be left holding the bag again.)

The condition of the macro-economy could affect housing. Remember that at the start of this great recession there was a great deal of denial (obfuscation? Evasion? Some might say…outright lying?) about how bad things would get. Europe is probably in a recession now…stats from China and other major economies suggest the possibility that the major engines of growth in the global economy are weak and getting weaker. Could the U.S. Economy continue it’s paltry growth of 2% per year or so if rest of the world turns down?

It certainly won’t help our exports if the rest of the world goes into recession. Plus, that will prompt other nations to lower interest rates even further to devalue their currencies as well. When every nation on the planet wants to devalue their currency at the same time what happens? Buy gold?

“I’m a realtor in Las Vegas. The only deals being closed are cash deals (investors). Had an agent tell me they wouldn’t bother with an FHA application. The market is fucked and I suspect many of these investors are in for a rude awakening in about 6 months, just like last time the bottom fell out as repos start to kick back up.”

With so much inventory being kept off the market it looks like banks are being picky and taking cash buyers. How long will they hold inventory back?

Until Nevada relaxes the anti-foreclosure law they passed last November, it will be difficult for the banks to bring back the supply. There are about 100,000 Nevadans not paying their mortgages. As they come to believe that banks either can’t or won’t foreclose, this number will likely grow larger.

They can hold inventory as long as GAAP for banks says that accounts receivable is income and assets are marked to whatever. If anybody is holding their breath for the banks to foreclose in a timely fashion or sell REO, they are chasing windmills. The banks have no motivation to foreclose and sell and every motivation to extend and pretend.

I am a bit confused. In the long term the Fed’s influence on interest rates will fail. In the short term the bankers will do everything they can to continue receiving their bonuses and keep the status quo.

I don’t remember saying that I don’t think the banks can continue extend and pretend, especially with Federal Reserve and government support.

Success though? Succeed at what exactly? In the long term, trying to solve a insolvency problem with more debt, (liquidity is I think the term they use), but in the short term the debt bubble can grow and grow and grow, … , until one day, …

I don’t know if I am looking at who will succeed or fail as much as I am looking at how can I increase my net worth from correct long term forecasts.

All fiat currencies eventually fail, but so have all gold based currencies.

Sorry, I wrote an incomplete and meaningless sentence. Hopefully, I can clear it up.

“In the long term, trying to solve a insolvency problem with more debt, (liquidity is I think the term they use), but in the short term the debt bubble can grow and grow and grow, … , until one day, …”

Trying to solve an insolvency problem with more debt will eventually lead to currency devaluation and failure, but in the …

“These efforts will fail as they always have, and these loans will recycle back into the foreclosure system. Only this time, the US taxpayer will be liable for the losses instead of the stupid lenders who made the bad loans.”

What a colossal failure.

Also Mark’s mentioned 75% failure rate in 2 years for 60 day lates and loan mods is startling to read. Only a U.S. Senator or U.S. Representative could line up in front of camera and say to Americans with a straight face that 25% cure rate is rip-roaring policy success, and the call out “oops” about the long, painful drag on taxpayers that is sure to come.
To top it off, all of these CA legal hurdles that would otherwise clear out market mistakes are just making matters even worse.

They will keep throwing taxpayer money down this black hole indefinitely. There is not enough money in the world to right the mistakes of unintended consequence and moral hazard when combined with government guaranteed leverage.

Effectively, they have turned a banking crisis into a sovereign debt crisis.

We’ll probably pay for it in higher taxation too. The high-earning household whose peak earning years were ~1985-2010 received relatively favorable tax treatment, whereas the same type of household whose peak earning years are from ~2015-2040 will probably pay a much larger and disproportionate share of income taxes.

The questions remain are: Is the shadow inventory disproportionality higher in the higher priced area? If yes, how will the banks transfer these non-conforming bad loans to the taxpayers to end the recession? How longer will American be willing to further bailout the banks while “averting a depression”? The bankers have Reagan’s definitions of a recession and depression. It’s a recession when wage earners are out of work. It’s a depression when banksters are out of work or need to pay for their poor practices.

Mark, That’s 100% success rate. All the loan, 100% of the modified loans, the 25% good and 75% bad, are the federal government’s (taxpayers’) problem instead of the banks. Your and the next 2 generations’ tax dollars at work. Born into indentured servitude.

Overall nice article…but how can he claim mods have a 75% chance of foreclosure after 2 years? That was maaaaybe the case with ’08 vintage mods, but that’s certainly not the case now.

HAMP mods redefault 32% of the time after 2 years, and only a fraction of those foreclose. Let’s be extra generous a nd say non-HAMP mods redefault 45% of the time after 2 years. How does that equate to 75% foreclosures?

Unfortunately, his entire theory is based on this horrific assumption, which means Hanson is even sloppier than NAR when putting forth biased housing projections.

Mellow Ruse,
that makes the government backed modification 100% successful. The banks paid a very little fee to change a liability into an asset. The new loans or modification are the federal government problem now.

I wish that all my bad bets in Vegas could be reversed for 10 to 20 cents on the dollar. Of course any good bet, I keep.

Pardon my ignorance but how are they the Federal government’s problem? The ownership hasn’t transferred and 68% are paying their obligation after 2 years. The Treasury pays incentives as long as the loan remains current. Once the loan redefaults, it’s the banks’ problem.

Once the loan is backed by the GSEs, which all loan mods are, isn’t the government on the hook for the subsequent default? There’s no way the banks are taking on any liability for these bad loans. If they were, what’s the point of GSE insurance?